Good morning. My name is Melissa, and I will be your conference operator today. At this time, I would like to welcome everyone to the 2018 first quarter results conference call. [Operator Instructions]. This conference call contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words believe, expect, anticipate, intend, estimate, may, should, could, would, plan, future containment and other expressions that are predictions of the [Technical Difficulty]

Hey, Melissa?

The forward-looking statements are based largely on your expectations or forecast of future events can be affected by inaccurate assumptions and are subject to various business risks, unknown -- and unknown uncertainties, a number of which are beyond our control. Therefore, actual results could differ materially from the forward-looking statements contained in this document and readers are cautioned not to place undue reliance on such forward-looking statements. Digital Ally undertakes obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise. A wide variety of factors could cause or contribute to such differences and could adversely impact revenues, profitability, cash flows and capital needs. There can be no assurance that forward-looking statements contained in this document will, in fact, transpire or prove to be accurate. I will now turn the call over to Stan Ross to begin.

Thank you very much, everybody, for joining us today. I've got with me Tom Heckman, the company's CFO. I know we all had a conversation just a few weeks ago, so we did have several developments that have occurred and also some highlights in regards to some of the numbers that we wanted to make sure and point out as we had indicated some of the strategic moves that we've made to try to get the company back to a positive EBITDA and including profitability in the near term. So Tom, I'll let you hit the numbers, and then we'll move forward on our strategic alliance opportunities, litigation and Q&A.

Thank you, Stan, and welcome, everyone. I appreciate you joining us this morning. I do refer you to the 10-Q, the Form 10-Q, that we filed with the SEC earlier this morning, it's a more complete rundown of the quarterly events and activities and financial conditions. So please refer to that for a larger discussion of operations on that. What I'm going to look at is more of the significant developments and some of the trends that we are seeing in our financials. I know it's hard to say and believe that we saw improvement in a quarter that we had a $2 million operating loss. But let me discuss a little further and get into the numbers and the trends and what we're seeing and what we're optimistic about. First of all, we did have a revenue shortfall. We were $400,000 less than the fourth quarter 2017 and $2.7 million less than the first quarter of 2017, the year-ago quarter. But the thing that we need to keep in mind is we ended the quarter at $705,000 in order backlog that could have been shipped had we had the product. There was a supply chain issue, principally from our Asian suppliers, our Pacific Rim suppliers, that stopped product flow towards the end of the quarter and made it difficult to do that. We've largely had that rectified now, and we do believe that we'll get caught up and be at or near zero backlog at the end of the second quarter. So that was a temporary event caused by a supply chain glitch, primarily some cable manufacturers weren't able to supply components timely. So in any event, you had that $700,000 of backlog to our revenues for the current quarter, it paints a far different picture than the $2.5…

Yes, and thanks a lot, Tom. Just staying, I guess, with the litigation side of things. Things are really at a point where they're going to come to a head, obviously, in June. Really, it doesn't matter what the outcome of the IPR is at the patent office because of the fact that we already have two patents that are out there that have already handled the -- I guess, the invalidity attempts that both Taser and WatchGuard have made. So there are patents in place that have already been challenged that will allow us to move forward on the litigation against WatchGuard and be able to lift the way to where we'll be able to get that process moving forward. And as I mentioned on our year-end call in regards to litigation, our -- we have a pretrial date of July 24 set with the courts to, I guess, get to the point where we're going to finalize, have discovery, finalize and actually set a final court date and timing of selected jury. So the July 24 is coming upon us rather quickly as well. That being said and jumping back a little bit to the VIEVU and the Axon purchase of it, it really plays out pretty good for us no matter how it plays out. Because on one side, if they go ahead and live up to their obligations that are in the distribution agreement, you've got a situation where they could be presenting a sizable order with us that would have a very, very nice profitability for us. So that would assist greatly in the cash flow for the company. If they elect not to continue their obligations under the agreement, then it also opens up the ability for us to go out there and start…

[Operator Instructions]. And your first question comes from the line of Ish.

Ish, are you there?

Sorry, I didn't know I was on yet. Okay, I -- yes, a quick question regarding the zTrip contract that you guys got. Stan or Tom, could either one of you quantify the impact of this contract with zTrip in terms of what it can do on a monthly basis or over the three years? I think, Tom mentioned, three years.

Well, that's difficult to say, Ish, because we don't know how many total units would be out there. They will include both product revenue when we move to the newer cities. And as we grow with that, our service revenues or the typical FleetVU revenues on a monthly basis, but when you add in the product revenues, this thing could get rather large rather quickly. Our standard price or MSRP order is around $1,200 for the DVM-250, just for the hardware. And then you add in the monthly service fee in that. So this thing could be significant near term depending on the rollout pattern to the new locations. And we don't have a good handle on when and -- when that's going to happen. We do have the lineup installers and such, so there's some logistics that we've got to work through as well. But obviously, we'd be happy to work through the logistics. So I don't have a good answer for you other than this will be our largest commercial contract, by far.

Absolutely.

No doubt about it, we just don't know the exact timing of the rollout to the new cities.

Yes. We've got some -- a little bit of insight on regards to its immediate needs on areas where there are, believe it or not, Ish, they're starting to be quite a few cities that the airports are requiring video to be in the vehicles if they are going to be picking up passengers for hire. So we've got several cities that he has told us that there's a law passed at the airports where we've got to get units in for him right away. So we're familiar with that. And then the additional rollout goes as far as 45 days from now, we just don't have all that buttoned down yet. But we'll have a pretty good indication and it will be a lot more clearer on our second quarter call.

Okay. And in terms of the monthly price for the FleetVU for zTrip, what's the price for the FleetVU for the zTrip contract?

Yes. So I apologize, but we have an agreement in there not to disclose that as far as a per unit price, obviously. And you can be assured that with the size of this...

Is it the standard fee?

No, we gave them a discount. We gave them a discount. It's -- obviously, this is one of the largest ones that we've been able to -- that we have to date. And when you look at that and the ability that it gives us to give discounts in regards to our cloud operations and storage, we were able to go ahead and pass that additional discounts on to them.

Yes. Ish, understand that zTrip expects to use this as a marketing tool to gain ridership versus the other rideshare companies, and even the other taxicab companies. So obviously, they don't want a lot of this information to be out and -- because they are competitive, obviously, and they need to compete in the industry. And they've selected us and we've entered this long-term contract, and reciprocally, agreed not to disclose a lot of the financial details.

Okay. In terms of business strategy, you guys have an adviser for like -- for a long time now. Did anything come out of that strategic alignment and any updates on the patent situation? You're missing your revenues by a substantial margin, is this a fundamental shift in the company's strategy going forward?

No. I would tell you this, Ish, is that actually, the projections that we have submitted to those that have requested, I think we've been pretty much right on. First quarter was a little bit of a problem because of the cables that we needed to get in that we were unable to get the $700,000 worth of product out the door, but that has been fixed. And so we don't anticipate, nor do we see us coming into a shortfall in regards to the numbers that have been presented out there to the strategic individuals to date. So there hasn't been anyone that sat there and [indiscernible] interest. And you have to remember, we actually held Roth Capital back until we had an understanding of where the litigation stood. So we won our situation in October at the patent office, we won again against WatchGuard in December and then we had the litigation lifted, and the Markman's hearing on March 7. So the aggressive in us in regards to allowing or us moving forward, having companies come to Kansas City, us visiting some of their personnel and their facilities, that's really kicked in, I would say, more in the end of March than it had at any point in time. So we did get them there, they have done a very good job of, I'd say, deterring -- not deterring, but deflecting some of the calls that were coming in and handling it so that we could continue to do the day-to-day business until right now to where we're actually much more engaged, not only with just Tom and I, but we actually have our marketing and engineering teams talking with their side as well.

Okay. And in terms of the patent litigation, what is the next near-term event which is pretty material?

That I'll say is pretty material, the WatchGuard front just getting past the first -- I think it's the first week in June is what they're looking at coming down with something from the patent office. And no matter how they come down, whichever way they come down, it really doesn't matter. We will then immediately go back to the court down in Wichita, Kansas and say okay, we want to continue to move forward with the two patents that are already being violated and named, and we may go ahead and not even, much like we did with Axon, which we pulled the '292 because the majority of our damages are going to be under the '452. So we were able to pull the '292 to get that stay lifted. And so WatchGuard, you're going to see some movement on it in early June, at least in regards to the request of the stay being lifted, and us getting real aggressive in regards to finalizing any discovery and then moving forward on getting the court date set there. And of course, we've already have that set as far as the pretrial for July 24. I guess, there would be the Markman's hearing that would -- a ruling that could come down, and then we have to do a little bit of a mediation ordered by the court with Axon. But let's all be honest, there's not any probably real expectations of much success on that. So it'll probably move rather quickly to an actual, I want to say, a trial date and selection of jury.

And your next question comes from the line of Brian Levitt [ph].

In staying with the courts issues, I guess, the Marksman hearing took place the Axon case on March 7, correct?

That is correct.

And now we have discovery, it has to be completed within 60 days of the finalization of that hearing?

That is correct.

So we're done right now with discovery on the Axon case?

Well, it's based upon the 60 days from the Marksman's ruling.

Okay. So we...

So they could rule any day, and then that starts, basically, the 60-day clock.

Okay. Now that 60-day clock, obviously, has to be done before we go to their pretrial on the 24th, correct?

Well, I don't know that you have to have it done, but you could be there and say -- and all parties saying, look, we still feel very confident that we'll have everything done within 10 days or by the 10th of August or something like that. And so you still would be able to have your pretrial and still be able to set there and establish a trial date and the selection of jury. Whether or not we needed an extra week or two to complete discovery, that would not be a big issue.

Okay. So basically, there would not have to be a request for an adjournment or any type of an extension based upon discovery not being done?

I wouldn't see it to be that. I mean, I think even the court would say, "Are you kidding me? You need another week?" I'm not -- I wouldn't -- I would be surprised. But I'm not an attorney, but I -- that hasn't been brought to our attention.

Okay. Staying with that, obviously Axon had eyes on our contract with VIEVU before they were able to acquire VIEVU. Knowing that, they obviously saw we had a change of ownership in that agreement, correct?

Not sure. And again, the agreement, we can't elaborate a whole lot on either. We're -- both parties, Safariland, VIEVU and ourselves, were -- are under an NDA, and there are certain requirements under that agreement that they have to still live up to or they possibly could be in breach of the agreement. Much like us, if we -- we've got some obligations as well, mainly being that we're going to get them a shot to live up to their side of it first. But if they wanted to back out of it, I'm not too sure I have a problem with that. They -- put it in writing, we may accept it and move on with the others. And again, I want to emphasize that there's a lot of big players still in our industry that names don't come up as often because mainly the three of us, the WatchGuard, Axon and us, are in this litigation battle and patent infringement. But you still have companies out there like Panasonic and Motorola and L3, that are companies that also would be very intrigued and respectful of the patents, especially of their size, and would be interested in talking about modernization of the auto-activation technology.

Okay. And the reason why I'm asking this is, obviously, Axon doesn't go and take over VIEVU without knowing their business relationships and who they're in bed with. I understand you guys have NDAs, I understand they probably signed NDAs as well. But that being said, it's been Axon's major goal for the last three, maybe even four years, to kind of starve you guys out. If they agree with or continue with the contract that you guys had set up with Safariland, it kind of -- it does not kill their strategy that they had for the last 3 to 4 years?

True. Yes, I mean, if they go ahead and place the order that is needed to keep that contract alive, it's a very profitable contract for us. And so it would create them a -- it's double jeopardy almost. I mean, damned if you do, damned if you don't.

They kind of validify, and in the same sentence, they're also putting money in your pocket. I want to stay with that. Obviously, here in New York, we're all eyes on the NYPD and when they're going to roll out their body cameras that have been announced now for a while. Do you have any insight to when NYPD may be getting those cameras rolled out, being that it was with VIEVU, your former partner?

I do not. I know that they were very aggressively moving forward with their LE5, which I think the product that's really needed to live up to the commitments on -- that they said could meet. So I have not seen the big roll out yet. The other thing that I'm curious about, which I do not have the information on yet, is whether or not there would be a situation where that particular contract with the New York -- the NYPD, because of a change of control, ownership, whatever you want to say, if that would allow them to go back out for bid. So there's a lot of unknown surrounding this acquisition that they just announced.

But that NYPD contract must have hands-free activation, correct?

I believe that was a request, I don't know that it was a requirement.

Okay. All right. Let's segue to zTrip. Did we get that relationship based upon your positioning in your home state? Or is that something that came about from NASCAR?

No. We had a relationship with them before NASCAR, but it was a situation that they looked long and hard in regards to different companies. A matter of fact, they even tried some other products and bought some other products for some of their other cities. And when I met with them, maybe three weeks ago, they just flat said that while we are both based here in Kansas City, at the end of the day, if it wasn't for the fact that you guys got the best product, I wouldn't be doing this because I'm thinking much larger than Kansas City, obviously. So it was very, very nice, as Tom said, award that we won, and we're very pleased to be part of zTrip and their future and growth. And we'll work right beside them as much -- the best we can to support them.

And currently, we've got, what, roughly 10% of their fleet agreed upon being outfitted?

I think he's pushing -- yes, for right now, but I think is pushing for the majority of it.

Yes, we -- Brian, it's Tom. We've actually got units at some of the other locations as well. I don't have that number in front of me, but it's -- certainly the largest deployment is here in Kansas City, it's 450 units. We probably have another 200 or 300 at other locations. But with the consolidation under the zTrip flag, they have a captive insurance company, so obviously, they're going to try and get everybody in under the same type of liability protection or strategy, if you will. And it's very good omen for us to roll out to all the locations and probably get a full deployment. It won't happen in 2018, but certainly, in the coming years, I could see us being in all locations. And again, they're growing. They're planning to double, more than double in size by the end of 2018. So you got to run fast to keep up with these guys. They're moving quick.

And right now, they have roughly 5,000 vehicles out there?

Yes. Currently at 18 different U.S. cities, and they're moving to -- gosh, what was it? They're moving to 30 U.S. cities by the end of 2018 and 16 international cities by the end of 2018. So you can see they've got a very steep trajectory. And this is a good concept. When you see some of the safety issues, concerns out there with drivers, and particularly passengers, that you see daily on the news with some of the other rideshares, this is refreshing. This a different alternative, a safe -- "safer alternative" than some of the other rideshares. So it's exciting, and we hope that this concept takes off. It is different than the traditional rideshare because they do own the vehicles and they do have insurance coverage on all of those vehicles. So they certainly have incentive to put our products in there and monitor and maintain and -- passenger and driver safety.

And there are no further questions at this time.

Fantastic. Listen, I like to thank everybody for participating today. I'm real excited that you've got a little glimpse of how our numbers continue to see or be -- coming around as far as the direction that it's going. And we really look forward to being able to talk to you all again in the second quarter. And we will obviously keep you abreast of any pertinent news that would pop up before the end of the second quarter's call. But thank you, all, very much, and have a great day.

Thank you for joining today's conference call. You may now disconnect your lines.